Fed Chairman Powell testified on Wednesday before the House Financial Services Committee, as he’s required to do annually. The new young progressives on the Committee were not really able to trip him up, as Sen. Warren tried to do in the Senate, but that wasn’t the main focus of the hearing and the report.
One of the most important statements the chairman made was the Fed will “very carefully” watch the implementation of the new current expected credit loss standard of analyzing your bank’s transition to implementing the new capital standards.
“We think it would be better to simply exempt smaller traditional community banks from those new requirements,” OBA President and CEO Roger Beverage said. “Most observers agree the new CECL standard makes no sense for smaller banks, and frankly that’s what most of us thought S. 2155 would do. I still think that’s going to happen at some point; I’m just not sure when.”
During his testimony, Powell confirmed what the ABA and most state bankers associations have been saying for some time, expressing their collective concerns about CECL’s impact on small business lending.
The chairman tried to reassure the Committee this would not happen.
“We’re doing everything we can to avoid a big change that’s disruptive to lending,” Powell said during his testimony. “We’ve tried to work with banks so that they’ll be able to implement this FASB decision in ways that are not too disruptive and too expensive and too complicated.”
He added the Fed is allowing banks to phase-in the new standard over a three-year period.
The American Bankers Association has consistently raised concerns from the outset that the Fed’s three-year phase-in does not go far enough to ensure CECL will function as intended. The chairman warned there could still be significant adverse effects on regulatory capital as the standard is implemented, particularly in the event of an economic downturn.
“The ABA was right to raise this concern early in the process of setting up this nonsensical process,” Beverage said. “In fact, ‘ABA has long advocated for a quantitative impact study that would examine the effect of CECL throughout a credit cycle, including the standard’s effect on credit availability and procyclicality,’ a recent ABA memo told us, and they’ve been doing a lot more than that.”
Powell stopped short of joining the ABA’s call for such a study. But he did admit the Fed does not expect the standard to have a procyclical effect.